When cryptocurrency is hot, it’s absolutely scorching. A working example could be the present crypto climate, wherein bitcoin (BTC-USD) is on a tear and other digital tokens are following its lead.
As bitcoin’s rising tide lifts all (or at the least, most) cryptocurrency boats, shouldn’t crypto-related stocks also head north? Not necessarily, because the stock market doesn’t all the time take its cues from the crypto market.
Indeed, that’s considered one of the primary challenges of investing in cryptocurrency stocks. You’ve got to navigate two markets directly — and sometimes those markets are at odds with one another.
The ETFs and the halving
At the beginning, what’s lifting bitcoin in 2024? There are several contributing aspects at work. While that is difficult to measure or quantify, it’s likely that institutional investors are moving into cryptocurrency.
You’re not more likely to see 401(k) funds and family offices pile into Bitcoin this 12 months. Nevertheless, some financial big shots, corresponding to BlackRock (NYSE:BLK) and Fidelity, appear to be on the vanguard of a crypto-friendly movement.
I cited BlackRock and Fidelity specifically because those two financial firms have created bitcoin exchange-traded funds (ETFs). The Securities and Exchange Commission (SEC) made this possible when it approved bitcoin ETFs earlier this 12 months.
It is a significant event because it can spark further interest in cryptocurrency while enabling otherwise restricted funds and investors to not directly take a stake in bitcoin. Thus, it’s surely not mere happenstance that bitcoin suddenly rallied when the SEC finally approved spot bitcoin ETFs.
There also happens to be a vital cryptocurrency-related event coming up soon. In April, the reward that crypto miners receive for producing bitcoins shall be cut in half. That is generally known as the bitcoin halving.
Bitcoin halvings occur roughly once every 4 years, and bitcoin-price rallies have coincided with previous halving events. Nevertheless, the sample size is kind of small, so it’s difficult to attract any meaningful conclusions or predict what is going to occur to the bitcoin price in April.
For what it’s value, these halving events might put a floor on the bitcoin price since they’re a method to control the available, circulating supply of bitcoins. That’s long-term pondering though, and bitcoin may not necessarily rally through the next couple of months.
Bitcoin definitely rallied through the past few days though. For a hot minute, bitcoin surged past its previous all-time high of $68,789 set in November 2021 — hitting $68,991 on Tuesday.
Thus, it was a giant win for patient bitcoin investors who adhered to the strategy of “HODL” (hold on for dear life). Lots of these investors have held on through prolonged periods of maximum volatility, and now it looks just like the bitcoin bulls are back in the motive force’s seat.
Crypto stocks diverge from bitcoin
What about cryptocurrency-related stocks? Not everyone desires to own bitcoin ETFs, and a few investors prefer to take positions in corporations that provide crypto-associated services.
That’s an interesting strategy, but don’t assume that there’s a one-to-one correlation between bitcoin and cryptocurrency stocks. For instance, even while the news of bitcoin reaching an all-time high is within the headlines, Coinbase (NASDAQ:COIN) stock fell 2% to three% around midday on Tuesday.
Coinbase offers a cryptocurrency-trading platform, and it’s a decent-sized company with a $54 billion market capitalization. Compared, cryptocurrency mining corporations like Marathon Digital Holdings (NASDAQ:MARA) are much smaller; for instance, Marathon has a market cap of around $5 billion.
This size differential might explain why Coinbase stock declined 2% to three% while Marathon Digital Holdings stock tumbled 10%. Other examples of bitcoin-mining stocks that fell sharply include Riot Platforms (NASDAQ:RIOT) stock (down 7% midday) and Hut 8 (NASDAQ:HUT) stock (down 8%).
With the difference in the businesses’ sizes, Coinbase has one other advantage over mining corporations straight away. Remember, the April halving event implies that bitcoin miners’ rewards shall be cut in half. Definitely, that’s not great news for corporations like Marathon, Riot and Hut 8.
Most of all, these crypto-associated businesses still must generate revenue and navigate a difficult fiscal landscape through which borrowing costs are high. Although there’s a halving event coming up in April, these crypto businesses (and other corporations, as well) first must cope with a March Federal Reserve meeting.
In other words, cryptocurrency stocks are down today, but they’re not alone; in truth, the most important stock-market indexes are within the red. What’s worrisome for crypto businesses isn’t necessarily specific to that form of business. If the Federal Reserve signals that it’s going to maintain rates of interest higher for longer, all businesses shall be affected, and the smaller ones could get hit the toughest.
Sure, there could also be a buying opportunity if cryptocurrency stocks fall far enough. Just don’t operate under the idea that they’ll necessarily get well if bitcoin heads higher.